BILL ANALYSIS
AB 1508
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1508 (Torrico) - As Amended: May 4, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Taxation: credit: lending employees to schools.
SUMMARY : Allows a tax credit, for taxable years beginning on or
after January 1, 2010 and before January 1, 2013, in an amount
equal to 25% of the amount of qualified expenses incurred by a
taxpayer in connection with lending its employee to a public
school to assist in teaching of mathematics or science.
Specifically, this bill :
1)Allows a tax credit, under both the Personal Income Tax (PIT)
Law and the Corporation Tax (CT) Law, for the qualified
expenses incurred in connection with lending a taxpayer's
qualified employee to a public school.
2)Provides that the amount of credit equals to 25% of the amount
paid or incurred by the taxpayer during the taxable year for
qualified expenses.
3)Defines "qualified expenses" as either of the following:
a) "Qualified employee" expenses paid by the taxpayer for
teaching supplies, class materials, and equipment, to the
extent those expenses are associated with assisting in the
teaching of mathematics and science at a Title I public
school.
b) "Qualified employee" wages paid by the taxpayer for time
spent in a classroom assisting in the teaching of
mathematics and science at a Title I public school.
4)Defines "qualified employee" as an employee whose employment
specialty includes mathematics or science.
5)Defines "Title I public school" as any high school in the
state that is a part of a public school district in which at
least 40% of the children in the school attendance area are
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from low-income families or at least 40% of the students
enrolled are from low-income families eligible to receive
federal Title I funds.
6)Defines "mathematics" as instruction designed to develop
fluency in basic computational skills and an understanding of
mathematical concepts and mathematical reasoning and problem
solving. "Mathematics" includes, but is not limited to,
courses in algebra I, algebra II, linear algebra, calculus,
geometry, trigonometry, mathematical analysis, probability and
statistics, and advanced probability and statistics.
7)Defines "science" as instruction designed to develop skills
and procedures for the systematic pursuit of knowledge that
includes, but is not limited to, program solving and
recognition, the collection of data through observation and
experiment, and the formulation and testing of hypotheses.
8)Specifies that a tax credit is allowed to the taxpayer only if
all of the following occur:
a) A school district governing board certifies, by
resolution, that the taxpayer's employee is qualified to
assist in the teaching of mathematics and science.
b) The school issues a service record to the taxpayer,
certifying receipt of the services and compliance with the
applicable requirements.
c) The employee does not supplant, or otherwise replace,
any teacher at the school.
d) The taxpayer makes charitable contributions including,
but not limited to, classroom materials, resources,
equipment, or facilities.
9)Does not allow a deduction for that amount of qualified
expenses for which a credit is allowed under this bill.
10)Limits the maximum amount of credit to the total amount of
charitable contributions made by the taxpayer to the school
during the taxable year.
11)Allows a carryover of the unused credit for the next
succeeding seven years, if necessary, until exhausted.
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12)Requires the Legislative Analyst's Office to submit a report
to the Legislature evaluating the tax credit established
pursuant to this section, including the number of taxpayers
utilizing the credit, the identity of those taxpayers, and the
total dollar amount of tax credits issued per year.
13)Takes effect immediately as a tax levy.
EXISTING FEDERAL/STATE LAW :
1)Provide various tax credits designed to provide tax relief to
taxpayers who incur certain expenses (e.g., child adoption) or
to influence behavior, i.e. to provide incentives for
taxpayers to perform various activities that they may not
otherwise undertake.
2)Allow various deductions for ordinary and necessary business
expenses of trade or business, such as, wages and employee
benefits.
3)Allow individual and corporate taxpayers to deduct certain
expenses as itemized deductions.
4)Allow deductions for monetary charitable contributions or
gifts, or property, to qualified organizations formed for
religious, charitable, educational, scientific, or literary
purposes. A charitable contribution is defined as a
contribution or gift made exclusively for public purposes.
Individual taxpayers can claim charitable contributions as an
itemized deduction and can deduct the greater of the standard
deduction or itemized deductions from their adjusted gross
income (AGI) when computing taxable income. Corporate
taxpayers can claim charitable contributions up to 10% of the
corporation's taxable income, without regard to the amount of
charitable contribution, but the amount in excess of the 10%
limitation may be carried over for five years.
5)Impose limitations on the amount of deduction for individual
charitable contributions, depending on the individual's AGI
and the amount of contributions, the types of organizations
that receive the donations, and the type of property donated.
6)Provide that, if a taxpayer sends an employee to assist in
teaching at a school, it would be considered a charitable
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contribution under Internal Revenue Code (IRC) Section 170,
subject to certain limitations. Individual charitable
contributions shall not exceed either 50% or 30%, depending on
the organization to which a donation is made. [IRC section
170(b)(1)]. If the taxpayer has a Schedule C business, then
the wages would not be deducted on Schedule C and could be
taken on Schedule A as an itemized deduction. For
corporations, charitable contributions shall not exceed 10% of
the taxable income. [IRC Section 170(b)(2)]. Therefore, no
wage attributed to an employee working in a school can be
deducted as a business expense.
7)Require teachers for grades K-12 (including high school math
and science) to be credentialed, with certain exceptions such
as in emergency situations. Single subject and multiple
subject credentials may be issued when specified criteria are
met. A person working as an assistant under the direction of
a credentialed teacher need not be credentialed.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in a revenue loss of $30,000 in
fiscal year (FY) 2009-10, $100,000 in FY 2010-11, $140,000 in FY
2010-11, $110,000 in FY 2012-13, and $10,000 in FY 2013-14.
COMMENTS :
1)The author states that, "California has displayed an alarming
trend in corrections spending, while cutting back on more
productive and preventative investments like education. This
type of spending has revealed dire consequences as
California's economy has become increasingly dependent on a
skilled and highly educated workforce to remain competitive.
As one of the leaders in the 'new economy', more than half of
California's jobs require education and training beyond the
high school level and are projected to be higher in the next
ten years. This is also recognized by California business and
industry leaders as noted by the California Business
Roundtable: 'The shortage of qualified employees is the most
significant cost driver for California businesses. The
business community understands that education is the key to
building a prosperous California. That explains why
California's business leaders cited improving the quality of
K-12 public education as an important policy priority for
California's future growth.'
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"Unfortunately, California is seriously ill-equipped to meet
these workforce demands. California's students remain far
behind those in other states on many measures of achievement
and are dropping out of school in astonishing numbers. For
example, California ranked seventh from the bottom in eighth
grade math and second from the bottom in science on the 2005
National Assessment of Education Progress. Additionally,
about one-quarter of all California students who enter the
ninth grade fail to earn a diploma four years later.
"As a result, California sustains $46.6 billion in total
economic losses from every 120,000 20-year-olds who never
complete high school. Furthermore, more than two-thirds of
all high school drop outs use food stamps during their working
life and are 68% more likely to be on a welfare program."
2)The opponents question whether the proposed tax credit would
make a difference in the employer's decision to pay for, and
loan, an employee. The opponents urge the author to find a
provision of tax law that could be included in this bill to
make it revenue neutral, so that its effect could be
determined without loss to the General Fund.
3)Committee staff notes:
a) Background . It appears that the idea of loaning
employees to schools originated with the Silicon Valley
high-tech industry in 2000, in response to the industry's
need for a well-educated workforce skilled in mathematical
and scientific theory and applications. The original bill,
AB 81 (Cuneen & Alquist), was introduced in the 1999-2000
Legislative Session, offering three types of incentives to
increase the number of qualified math and science teachers
and the quality of math and science instruction in public
high schools, community colleges, and vocational
institutions in California. AB 81 failed passage in this
committee. In 2001, a similar proposal was sponsored by
Governor Gray Davis [AB 902 (Alquist)] and was included in
the Governor's 2001-02 Budget released in January. AB 902,
introduced in the 2001-02 Legislative Session, authorized a
nonrefundable tax credit to employers who lend a qualified
employee to a public middle or high school, or a community
college in the state. AB 902 was passed by the Assembly
but later was substantially amended, probably, because this
proposal was dropped in the Governor's May revision. SB
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558 (Morrow), introduced in the 2001-02 Legislative
Session, was similar to AB 902. SB 558 failed passage in
the Senate Revenue and Taxation Committee.
b) Purpose of this bill. According to the author,
California is facing a serious shortage in the workforce,
especially in the areas and industries involving math and
science. This bill is intended to address the high-tech
industry's need for a well-educated workforce skilled in
mathematical and scientific theory and applications, by
providing a tax incentive for the employers to loan their
employees to schools and to stimulate students' interest in
careers in the fields of math and science.
c) Why would an employer loan its employees to schools ?
Often, by loaning employees to other organizations,
employers could avoid layoffs during difficult economic
times, such as recessions. Direct and indirect costs of
layoffs - like losing experienced and high-skilled
employees - can cause lasting damage to a business. Also,
employees are more likely to quit jobs in companies that
have repeated downsizing. After the 2001 recession,
companies that had not pursued layoffs were in a position
to increase their market share significantly compared to
the companies that had downsized. Diamond Management and
Technology Consultants examined 415 companies worldwide
with revenues exceeding $100 million from 1998 to 2003. In
its report, "Don't Waste a Crisis: Lessons from the Last
Recession," Diamond concluded that companies that did not
pursue across the board layoffs, fared better after the
recession, than those that used layoffs extensively.
It seems unlikely, however, that businesses would loan their
employees to schools if the skills and experience of those
employees could be fully utilized by the employers.
Ultimately, businesses (other than professional employer
organizations or PEOs) are not in the business of hiring
employees and loaning them to other organizations, even if
those organizations are schools.
d) Current tax incentives. Employers loaning their
employees to other organizations may claim a charitable
deduction for the gross salary, payroll taxes and benefits
paid during the loan period. AB 1508, however, proposes a
tax credit for, what seems to be, the same expenses that
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could be currently deducted by the employer. In other
words, under existing law, businesses could ask their
employees to assist schools in teaching math and science
and deduct the wages paid to the employees as a charitable
expense. But the value of a tax credit greatly exceeds the
value of a deduction. A tax credit is more valuable
because it lowers the tax liability dollar for dollar. A
deduction decreases the taxable income, so the value
depends on one's tax bracket. For example, if a taxpayer
is in the 25% bracket, a $1,000 deduction would lower the
taxpayer's tax bill by $250. In contrast, a $1,000 credit
decreases the tax liability by the full $1,000, regardless
of the tax bracket.
It should also be noted that a deduction for charitable
contributions is limited. Thus, for individual taxpayers,
a deduction shall not exceed either 50 percent or 30
percent of the contribution, depending on the organization
to which a donation is made. Corporate taxpayers can claim
charitable contributions only up to 10% of the
corporation's taxable income, without regard to the amount
of charitable contribution. The amount in excess of the
10% limitation may be carried over for five years.
Therefore, in the case of a corporation, the value of the
credit proposed by this bill is even higher because of the
current limitations on the amount of charitable deductions.
This bill, in essence, rewards businesses with a tax
credit for volunteering their employees.
e) Savings to schools. This bill uses the tax system as a
convenient means of delivering a specific subsidy to those
companies that contribute to schools. Committee may wish
to consider whether a direct grant program be a better
vehicle to achieve the same goal. Further, savings realized
by schools under this bill may eventually be
counter-balanced by a decrease in state funding because of
the loss to state revenues. The Committee may wish to
examine the rationale of using the General Fund money to
pay for volunteers, in the form of a tax credit, instead of
using that money to compensate teachers directly.
f) The limitation on the amount of credit . This bill
limits the amount of credit that could be taken by a
taxpayer to 25% of the amount of qualified expenses. It
also restricts the maximum amount of credit to the amount
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of taxpayer's charitable contributions made to the school
during the taxable year (perhaps, to encourage more
charitable giving). Finally, this bill prevents
double-dipping by specifying that no taxpayer may claim a
deduction for the same expenses for which a credit is
claimed. Nonetheless, this bill still presents an
opportunity for taxpayers to engage in tax planning by
allowing taxpayers to control the timing of their
employees' contribution to schools.
g) Teachers vs. volunteers . The schools that receive a
volunteer are not required to pay anything or provide any
training. Financially strapped schools may have an
incentive to allocate fewer resources to their math and
science department and rely more on regular volunteers. In
order to prevent schools from replacing teachers with
volunteers, this bill requires that the "loaned" employee
do not supplant, or otherwise replace, any teacher at the
school. It is unclear, however, who is going to make that
determination and who will certify to the FTB that that
condition was met.
h) Qualified expenses . The definition of "qualified
expenses" eligible for the credit is broad enough to
include expenses for teaching supplies, class materials,
and equipment. Under existing law, teachers who buy
teaching supplies, class materials and equipment may only
deduct those expenses and then only in certain, limited
circumstances. What is the rationale of allowing the
company that loans employees who work as teachers'
assistants a tax credit (instead of a deduction) for those
same expenses? It seems inequitable, especially in light
of the fact that the company can already claim a charitable
deduction for those same expenses. The Committee may wish
to consider limiting the definition of "qualified expenses"
only to wages paid by the taxpayer for its employee's time
spent in a classroom assisting in the teaching of
mathematics or science at a Title I public school.
i) Math and science . This bill provides a tax incentive
only to a specific group of taxpayers - those businesses
that employ people whose "employment specialty includes
mathematics or science." As noted in the analysis of this
bill by the Committee on Education, one could argue that
great literary artists would be equally beneficial in the
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classroom and struggling publishing companies could also
benefit from a similar tax credit. This bill favors one
group of taxpayers over another and creates a precedent for
a generous tax credit for industries that employ certain
types of workers. The Committee may wish to consider
whether it is equitable to provide a tax credit only to
companies in math and science fields, at the expense of
other areas, such as history, literature, or art.
j) This bill was double-referred with the Committee on
Education and passed out of that committee by a vote of 9
to 1 on April 30, 2009. For a more comprehensive
discussion of this bill, refer to that committee's
analysis.
aa) Legislative History .
SB 558 (Morrow), introduced in the 2001-02 Legislative
Session, was substantially similar to this bill. SB 558
failed passage in the Senate Revenue and Taxation
Committee.
AB 462 (Wyland & Zettel), introduced in the 2001-02
Legislative Session, would have authorized a credit in an
amount equal to 50% of the costs incurred by the employer
in loaning its employees to high schools or community
colleges in taxable years 2002 through 2006. AB 462 was
referred to this committee but was never heard.
SB 1948 (Lewis), introduced in the 1999-2000 Legislative
Session, would have granted a 50% credit to employers that
lend their employees to public schools, community colleges,
or vocational institutions in California for the purpose of
teaching mathematics or science during the 2001 through
2004 tax years. SB 1948 was never heard by a committee.
AB 81 (Cuneen & Alquist), introduced in the 1999-2000
Legislative Session, would have offered three types of
incentives to increase the number of qualified math and
science teachers and the quality of math and science
instruction in public high schools, community colleges, and
vocational institutions in California. One of those
incentives was nearly identical to the credit authorized by
this bill. AB 81 failed passage in this committee.
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3)Suggested amendments . The Committee staff notes that the
definition of "qualified employee" as an employee whose
employment specialty includes mathematics or science seems too
broad and should be clarified. In addition, the Committee
staff suggests that the phrase "employment specialty" and the
terms "mathematics" and "science" be defined narrowly to avoid
disputes between the FTB and taxpayers. The FTB staff
recommends that this bill define "Title I public school" as
any high school classified as such under Sections 6301 to
6339, and Sections 6571 to 6578 of Title 20 of the United
States Code. The FTB staff also identified several
implementation concerns and suggested the following technical
amendments:
AMENDMENT 1
On page 2, line 26, at the end thereof insert:
For purposes of the preceding sentence, wages are limited to
those wages subject to withholding under Section 13020 of the
Unemployment Insurance Code.
AMENDMENT 2
On page 3, line 35, after "facilities" and before ".",
insert:
in excess of a taxpayer's qualified expenses.
AMENDMENT 3
On page 3, line 39, at the end thereof, strike "year."
and insert:
year in excess of the taxpayer's qualified expenses for that
year.
AMENDMENT 4
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On page 4, line 40, at the end thereof insert:
For purposes of the preceding sentence, wages are limited to
those wages subject to withholding under Section 13020 of the
Unemployment Insurance Code.
AMENDMENT 5
On page 6, line 8, after "facilities" and before ".",
insert:
in excess of a taxpayer's qualified expenses.
AMENDMENT 6
On page 6, line 12, at the end thereof, strike "year."
and insert:
year in excess of the taxpayer's qualified expenses for that
year.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098